Why Roth IRA when you have not maxed out 401k?

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stingray777
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Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 08, 2019 3:58 pm

Hello, this is my first posting, and I am new to investment. I've read books written by Dave Ramsey, Daniel Solin, and Jane Bryant Quinn along with a few online articles. I've got Bogleheads investing book in my hand (just started). Most say that you want to invest gross 15% into retirement. (Fine.) Now, the order is, do the company match, put $6000 into your Roth IRA, then the rest goes back into 401K.

I do not understand why. They do not really explain. If the available amount is the same, it should depend on other factors.
The workplace offers 401k and Roth 401k, and I am starting next month. So I have 3 choices for my bags - traditional 401k, Roth 401k and Roth IRA.
My understand is that under most circumstances, if you will be in a lower tax bracket after you retire than you are now, Roth is NOT a better option. Is that correct?

Here are my conditions:
- New to retirement plan. I was putting aside only 2% just to get a company match
- The employer is switching from Simple Plan to full-scale 401k and Roth 401k in January next year
- 20 years till retirement.
- I do not make tons of money
- Most likely I will be in a lower tax bracket when I retire. Not enough in the bag.
- Different online calculators say I get $500K when I retire.
- I have not seen the selection of funds that the employer offers (available in a few days), but I heard that there would be Vanguard index funds. Yes!

Q1 - Under the circumstance, do I still want to open Roth IRA, like these authorities say? If so, why? I think it is applicable only if you get million dollars or more in the bag, and you will be in a higher tax bracket.
Q2 - Traditional 401k over Roth 401k for me, right? Online calculators show I get more if I did Roth 401k. I don't understand.
Q3 - Before the year is over, I want to put as much as possible into either 401k or Roth IRA. The employer is moving from simple plan to 401k. Is there going to be a fee for transfer from simple to 401k, based upon how much you have in it? If so, I want to open up Roth IRA and put $6000 there now. If not, probably as much as possible into 401k. I think HR said you can write a check. I will put them into VTSMX in Roth IRA, just like I am planning to use that in 401k.

If you correct me, I really appreciate it, and thank you so much!

mortfree
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Re: Why Roth IRA when you have not maxed out 401k?

Post by mortfree » Sun Dec 08, 2019 4:11 pm

You can add to your 2019 Roth up to tax day 2020.

If you are only allowed to put 6k in the Roth but 19k in 401k then that should tell you something.

I max both.

Triple digit golfer
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Triple digit golfer » Sun Dec 08, 2019 4:17 pm

Here is a great thread for you.

viewtopic.php?f=10&t=61529

I tend to agree with you. If your 401k has good, low-cost plans and you plan on being in a lower bracket when you retire, there's a good case for maxing it out before investing in a Roth IRA.

Read the wiki, too. There are other considerations. You can theoretically use a Roth as an emergency fund and withdraw contributions tax and penalty-free, you can use a Roth to "tax diversity," etc.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

mhalley
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Re: Why Roth IRA when you have not maxed out 401k?

Post by mhalley » Sun Dec 08, 2019 4:24 pm

The book can only give broad recommendations, and may not be right for everyone. The number of years to retirement, current and projected tax bracket, projected rmds and social security, whether there is money in a taxable account all play a role. Another factor is if you plan to retire before taking SS, giving you time to do Roth conversions before rmds and SS. Another reason for the Roth before going back to the 401k is that many don’t have a Roth 401k available, plus many 401ks do not have low cost fund availability. Plus Roth 401ks have rmds. In addition, a current good 401k could become a future bad one when employers change providers.
As we can only guess at future tax changes, diversification of funds between taxable, pre tax and post tax accounts seems prudent.

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Sun Dec 08, 2019 4:28 pm

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
I do not understand why. They do not really explain.
See Investment Order for a few more "whys" to go with the "whats".

02nz
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Re: Why Roth IRA when you have not maxed out 401k?

Post by 02nz » Sun Dec 08, 2019 4:28 pm

It's good to have both a tax-deferred (traditional) and Roth balance. For many that means contributing to both a 401k and a Roth IRA.

A lot depends on your tax rate. I would probably favor traditional contributions for income that would otherwise be taxed now at 22% or higher federal. If you're already at or below the 12% bracket, I might prioritize Roth IRA contributions first.

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Sun Dec 08, 2019 4:37 pm

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
My understand is that under most circumstances, if you will be in a lower tax bracket after you retire than you are now, Roth is NOT a better option. Is that correct?
What is "better" depends on the other option. E.g., for the situation you describe, if comparing vs. a deductible traditional IRA Roth is not better. But if comparing vs. a non-deductible traditional IRA or a taxable account, Roth likely is better.

Would need to know specific numbers before answering your Q1/Q2/Q3. Determining your current marginal tax saving rate and projecting your future marginal tax rate on traditional withdrawals could be a useful self-study exercise. See the https://www.bogleheads.org/wiki/Traditional_versus_Roth wiki that T.d.g. referenced for ways to do that.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Sun Dec 08, 2019 4:46 pm

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
Hello, this is my first posting, and I am new to investment. I've read books written by Dave Ramsey, Daniel Solin, and Jane Bryant Quinn along with a few online articles. I've got Bogleheads investing book in my hand (just started). Most say that you want to invest gross 15% into retirement. (Fine.) Now, the order is, do the company match, put $6000 into your Roth IRA, then the rest goes back into 401K.

I do not understand why.
When that order was first decided on, many 401k plans were poor or mediocre (meaning many did not have low cost funds). It made sense to contribute only enough to get the full match and then put your remaining money into an IRA (assuming you could not fill both accounts in a year).

Since a high number of people cannot deduct a contribution to tIRA and since Roth IRA offers "tax-diversification", the suggestion was to put the remaining money into Roth IRA.

That is still reasonable general advice, but many things have changed. Following that blindly may not be your best choice. (But following it blindly is also unlikely to get you into any trouble.) :happy


My understand is that under most circumstances, if you will be in a lower tax bracket after you retire than you are now, Roth is NOT a better option. Is that correct?
If you mean Roth 401k, in general that is correct, but there are exceptions. We don't know enough about your situation to know if you are an exception at this point.


- I do not make tons of money
This will be one of the factors. For example, if you are a low earner but cannot get low enough to obtain some tax credits, you might want to use more Roth than traditional. This is because you may be in the lowest tax bracket you will ever be in. Might as well get money into Roth at a low tax rate.

On the other hand, if you are a low earner but contributing to t401k and tIRA (if deductible) can get you into the territory to claim some tax credits, using traditional is likely better.


- I have not seen the selection of funds that the employer offers (available in a few days), but I heard that there would be Vanguard index funds. Yes!
That might be a good sign but wait until you see if there are some other added on fees before you get too excited.


Q1 - Under the circumstance, do I still want to open Roth IRA, like these authorities say? If so, why? I think it is applicable only if you get million dollars or more in the bag, and you will be in a higher tax bracket.
Yes, at some point you want to start your Roth IRA if for no other reason than to get the 5 year "qualification" clock started.

Mostly, everyone should retire with some tax-deferred assets and some already taxed assets (like Roth). What changes as you go through your career is how much is best to contribute to each one each year.


Q2 - Traditional 401k over Roth 401k for me, right? Online calculators show I get more if I did Roth 401k. I don't understand.
We don't really have enough information to help with this yet. It could be one or the other or a combination of the two.


Q3 - Before the year is over, I want to put as much as possible into either 401k or Roth IRA.
If you have not put money into IRA yet, go ahead and put money into Roth IRA for this year. No matter what happens, that can't be much of a mistake even if it is not the very best choice. You cannot contribute to the 401k this year since you currently have a SIMPLE IRA.

The employer is moving from simple plan to 401k. Is there going to be a fee for transfer from simple to 401k, based upon how much you have in it?
Unknown. Depends on your plan. However, you cannot transfer any money out of that SIMPLE IRA until 2 years after the first contribution. Has that time passed?

If so, I want to open up Roth IRA and put $6000 there now.
That is likely a good idea no matter what.

If not, probably as much as possible into 401k.
It sounds like the 401k plan is not available until January 1st anyway.


What would be good for you is to post your information (when you get it) in the format we use to help people with their portfolio questions. See that format in the link at the bottom of this message.

I know you are anxious to get started, but don't get in a hurry and do things that need to be un-done later.

MotoTrojan
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Re: Why Roth IRA when you have not maxed out 401k?

Post by MotoTrojan » Sun Dec 08, 2019 4:50 pm

Not sure what online calculator you’re using but make sure you aren’t counting $1 in Roth equal to $1 in traditional.

If your budget allows you to put $10K in to a traditional 401k but nothing more, then you need to adjust the Roth value down to have the same impact on your take-home pay.

RetiredAL
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Re: Why Roth IRA when you have not maxed out 401k?

Post by RetiredAL » Sun Dec 08, 2019 5:48 pm

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm

My understand is that under most circumstances, if you will be in a lower tax bracket after you retire than you are now, Roth is NOT a better option. Is that correct?
There is no simple 'one shoe fits all' answer.

However, one item to not forget is that someday you or your spouse will likely be "single" and what that tax rate will be.

While working, we contributed max $ to my rIRA and spouse's rIRA, along with my 401K contributions in excess of the matching limits. I wanted a blend of 'no future tax' vs 'less tax $ now but future taxable'.

Now retired, I've been converting some tIRA $ to rIRA each year at a 'not a great tax rate', but one that is less than what a "single" would be paying on the RMD due to the SS Tax Hump effects.

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grabiner
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Re: Why Roth IRA when you have not maxed out 401k?

Post by grabiner » Sun Dec 08, 2019 9:28 pm

One additional advantage of a Roth IRA is that you can withdraw contributions at any time without tax or penalty. (You can't do this in a Roth 401(k) until you leave the employer and roll it into a Roth IRA).

If you are not maxing out your retirement accounts, you could hold an emergency fund in your Roth IRA, getting tax-deferred growth if you don't need the money, but having the money available if you do need it. (If you do this, put enough for your emergency fund in a low-risk investment such as a short-term bond fund.)
Wiki David Grabiner

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 08, 2019 9:57 pm

Triple digit golfer wrote:
Sun Dec 08, 2019 4:17 pm
Here is a great thread for you.

viewtopic.php?f=10&t=61529

I tend to agree with you. If your 401k has good, low-cost plans and you plan on being in a lower bracket when you retire, there's a good case for maxing it out before investing in a Roth IRA.

Read the wiki, too. There are other considerations. You can theoretically use a Roth as an emergency fund and withdraw contributions tax and penalty-free, you can use a Roth to "tax diversity," etc.

https://www.bogleheads.org/wiki/Traditional_versus_Roth
Thank you for the links. I am glad that other people thought and wondered about this, because I could not find any. I read through the first page of the topic, and I have two more pages to go. I think my point still stands. I am in 22% bracket now, and I will be in 12% bracket then, just because I was not wise enough like people here when I was younger. I just don't have enough time.
There is a possibility that the lowest tax bracket becomes more than 22%, but my calculation and decision comes from its being lower then.

I was also thinking about long term investment between now and before retirement. For that case, Roth IRA works great, because I just leave it there if I don't need it, and if I do, I just pay tax then on the profit. No penalty. No loss. It is a better choice than doing it with take-home pay. Thank you for confirming my theory (that I did not mention here). BTW, I have cash emergency fund in money market account, so I think the cash stays there.

I will keep on reading this thread. Thank you, everyone!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 08, 2019 10:05 pm

mhalley wrote:
Sun Dec 08, 2019 4:24 pm
The book can only give broad recommendations, and may not be right for everyone. The number of years to retirement, current and projected tax bracket, projected rmds and social security, whether there is money in a taxable account all play a role. Another factor is if you plan to retire before taking SS, giving you time to do Roth conversions before rmds and SS. Another reason for the Roth before going back to the 401k is that many don’t have a Roth 401k available, plus many 401ks do not have low cost fund availability. Plus Roth 401ks have rmds. In addition, a current good 401k could become a future bad one when employers change providers.
As we can only guess at future tax changes, diversification of funds between taxable, pre tax and post tax accounts seems prudent.
Thanks for listing other points. Under my circumstance, and with the assumption that I will be in lower tax bracket, maxing out 401k first sounds like a winner. I have to work as long as I can if my health permits, because I have almost nothing in the bag now, traditonal 401k is the way to go.

People who has 30-40 years until retirement should probably do what these books say.
Thank you!

Triple digit golfer
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Triple digit golfer » Sun Dec 08, 2019 10:06 pm

stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
Triple digit golfer wrote:
Sun Dec 08, 2019 4:17 pm
Here is a great thread for you.

viewtopic.php?f=10&t=61529

I tend to agree with you. If your 401k has good, low-cost plans and you plan on being in a lower bracket when you retire, there's a good case for maxing it out before investing in a Roth IRA.

Read the wiki, too. There are other considerations. You can theoretically use a Roth as an emergency fund and withdraw contributions tax and penalty-free, you can use a Roth to "tax diversity," etc.

https://www.bogleheads.org/wiki/Traditional_versus_Roth
Thank you for the links. I am glad that other people thought and wondered about this, because I could not find any. I read through the first page of the topic, and I have two more pages to go. I think my point still stands. I am in 22% bracket now, and I will be in 12% bracket then, just because I was not wise enough like people here when I was younger. I just don't have enough time.
There is a possibility that the lowest tax bracket becomes more than 22%, but my calculation and decision comes from its being lower then.

I was also thinking about long term investment between now and before retirement. For that case, Roth IRA works great, because I just leave it there if I don't need it, and if I do, I just pay tax then on the profit. No penalty. No loss. It is a better choice than doing it with take-home pay. Thank you for confirming my theory (that I did not mention here). BTW, I have cash emergency fund in money market account, so I think the cash stays there.

I will keep on reading this thread. Thank you, everyone!
We're also in the 22% tax bracket. We are prioritizing tax-deferred before Roth. A lot of it depends on how good your 401k is, fund choices and costs.

Also, check out the current thread called "Can you have too much Roth" or something similar.

Triple digit golfer
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Triple digit golfer » Sun Dec 08, 2019 10:07 pm

stingray777 wrote:
Sun Dec 08, 2019 10:05 pm
mhalley wrote:
Sun Dec 08, 2019 4:24 pm
The book can only give broad recommendations, and may not be right for everyone. The number of years to retirement, current and projected tax bracket, projected rmds and social security, whether there is money in a taxable account all play a role. Another factor is if you plan to retire before taking SS, giving you time to do Roth conversions before rmds and SS. Another reason for the Roth before going back to the 401k is that many don’t have a Roth 401k available, plus many 401ks do not have low cost fund availability. Plus Roth 401ks have rmds. In addition, a current good 401k could become a future bad one when employers change providers.
As we can only guess at future tax changes, diversification of funds between taxable, pre tax and post tax accounts seems prudent.
Thanks for listing other points. Under my circumstance, and with the assumption that I will be in lower tax bracket, maxing out 401k first sounds like a winner. I have to work as long as I can if my health permits, because I have almost nothing in the bag now, traditonal 401k is the way to go.

People who has 30-40 years until retirement should probably do what these books say.
Thank you!
Yes, until you have a significant tax-deferred balance, or unless you'll have a big pension, go traditional to fill up those lower brackets in retirement.

nix4me
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Re: Why Roth IRA when you have not maxed out 401k?

Post by nix4me » Sun Dec 08, 2019 10:13 pm

401k's turn into tax bombs

Topic Author
stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 08, 2019 10:22 pm

FiveK wrote:
Sun Dec 08, 2019 4:28 pm
stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
I do not understand why. They do not really explain.
See Investment Order for a few more "whys" to go with the "whats".
Thanks for the link. MDM said lastly in the thread: "Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem. If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem." Interesting unless the tax bracket changes drastically, but no one knows.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Sun Dec 08, 2019 10:27 pm

02nz wrote:
Sun Dec 08, 2019 4:28 pm
It's good to have both a tax-deferred (traditional) and Roth balance. For many that means contributing to both a 401k and a Roth IRA.

A lot depends on your tax rate. I would probably favor traditional contributions for income that would otherwise be taxed now at 22% or higher federal. If you're already at or below the 12% bracket, I might prioritize Roth IRA contributions first.
I wanted to know why it was good to have both. I think if you end up with only $500K or less, then tradition 401k is it.
Thank you!

aristotelian
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Re: Why Roth IRA when you have not maxed out 401k?

Post by aristotelian » Sun Dec 08, 2019 10:35 pm

If you are sure that you will be in a lower tax bracket in retirement, then 401k should absolutely take priority. You are right, you will save more pretax than you would be able to put in the Roth after tax and end up coming out ahead. Ramsey et al are giving generic advice, often for people who aren't great with money. If you don't fit the profile of their audience, you don't need to follow their advice. That said, a couple of considerations for Roth:

1) Diversification. Even if you are certain of being in a favorable tax bracket in the future, you can never know what the tax code will look like. At least some amount in Roth can be advantageous.

2) Liquidity. If you are struggling to max your retirement accounts, that means you likely don't have a big liquid taxable account either. Roth contributions can be withdrawn penalty free whereas 401k funds are much more difficult to access. For that reason, it may make sense to prioritize Roth even if the 401k would be optimal from a tax standpoint.

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Sun Dec 08, 2019 10:38 pm

stingray777 wrote:
Sun Dec 08, 2019 10:22 pm
Thanks for the link. MDM said lastly in the thread: "Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem. If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem." Interesting unless the tax bracket changes drastically, but no one knows.
One can indeed guess incorrectly due to
a) personal circumstances differing significantly from projections, or
b) overall tax law differing significantly from projections.

In any case, you pays your money and you takes your chances.

MathWizard
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Re: Why Roth IRA when you have not maxed out 401k?

Post by MathWizard » Sun Dec 08, 2019 11:08 pm

IRAs have many more options.

You can withdraw contributions (not earnings) anytime without penalty ( but you can't out it back in). This means Roth IRA can pull double duty: retirement and low probability emergencies.

When you are going, you generally are in a low bracket (say 12% now). Getting some tax free IRA now is cheaper than later.

If you are in the 22% bracket, a Roth may not be for you, and the 491k maybe a better option.

Bama12
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Re: Why Roth IRA when you have not maxed out 401k?

Post by Bama12 » Sun Dec 08, 2019 11:32 pm

Depends on a few things for me.

I have a Roth 401K and/or Regular 401k, the match is Regular 401k only.
It's with Vanguard and I can get 7 funds I believe in but I can't get 5 funds I believe in so I buy them in my Roth.

I put 6% in my 401k Roth and 4% in Regular 401k.
I max out my Roth.

The only draw back for me is I put 10% in bonds in my 401k but it's 6% in Roth and 4% regular. Wish I could pick what funds went where but's it all or none.

I love my Roth because I can get my money out when I need it, if I ever did need it.

I love my Roth 401k because It grows tax free. I love my regular because of the tax break.

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CyclingDuo
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Re: Why Roth IRA when you have not maxed out 401k?

Post by CyclingDuo » Mon Dec 09, 2019 12:39 am

stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
I think my point still stands. I am in 22% bracket now, and I will be in 12% bracket then, just because I was not wise enough like people here when I was younger. I just don't have enough time.
You mentioned upthread that you have 20 years until retirement. That's a lot of time allowing you to use your human capital for income, living below your means, and saving at a high percentage rate to play catch up.

Roth IRA's only started 21 years ago in 1998, so they haven't been around for many of us our entire investing lives. Many of us spent the first 5 to 10 years of our working careers paying off all our student loans before investing. In other words, not all forum members started saving when they were younger. Learning how to catch up and use the time you have remaining is still in your favor.

The Roth IRA maximum contribution history from 1998 to 2016...

Image

Between your new 401k, the Roth IRA and taxable investing - you have plenty of options to accumulate a nest egg over the course of the next two decades.

Roth IRA at various starting ages...

Image

Save how much per month or per year starting at various ages to build a nest egg...

Image
https://www.businessinsider.com/build-a ... nt-2016-12

https://www.cnbc.com/2019/05/13/wealth- ... years.html

The limiting factor is always the salary/income one has to work with for investing/saving and still paying for your current household expenses. One does not have to max out their 401k and a Roth IRA to accumulate wealth. You save what you can, but save as much as you can to take advantage of the next 20 years. If that means you can max out your plans, then do so and contribute to a taxable account as well if enough income is available to do that.

All the best.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Mon Dec 09, 2019 7:32 am

stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
I was also thinking about long term investment between now and before retirement. For that case, Roth IRA works great, because I just leave it there if I don't need it, and if I do, I just pay tax then on the profit. No penalty. No loss.
This is not how Roth works. There is no tax on the profit.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:07 pm

Triple digit golfer wrote:
Sun Dec 08, 2019 10:06 pm
stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
Triple digit golfer wrote:
Sun Dec 08, 2019 4:17 pm

We're also in the 22% tax bracket. We are prioritizing tax-deferred before Roth. A lot of it depends on how good your 401k is, fund choices and costs.

Also, check out the current thread called "Can you have too much Roth" or something similar.
I will check that out. Thanks.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:28 pm

retiredjg wrote:
Sun Dec 08, 2019 4:46 pm
stingray777 wrote:
Sun Dec 08, 2019 3:58 pm

What would be good for you is to post your information (when you get it) in the format we use to help people with their portfolio questions. See that format in the link at the bottom of this message.

I know you are anxious to get started, but don't get in a hurry and do things that need to be un-done later.
Thank you so much for trying to answer all my questions. You are very helpful. Our 401k website is not ready as of today, so I need to wait for a few more days. It does not take my initial login yet.

I suppose you are talking about checking my 401k's overhead management cost on top of expense ratio from each Vanguard index fund. I will try to look for it in the website. So, fund's expense ratio is the same as that of straight from Vanguard, right? Then what range should that management cost for my 401k be in?

If I buy the same fund from my Vanguard Roth IRA, is it free (if more than $10k in the account, or something like that)? Is that why people tend to use Roth IRA, even when they have the same funds of their preference?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:30 pm

MotoTrojan wrote:
Sun Dec 08, 2019 4:50 pm
Not sure what online calculator you’re using but make sure you aren’t counting $1 in Roth equal to $1 in traditional.

If your budget allows you to put $10K in to a traditional 401k but nothing more, then you need to adjust the Roth value down to have the same impact on your take-home pay.
Good point. They are not that smart... Is there a calculator that you know of, that works the best?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:36 pm

grabiner wrote:
Sun Dec 08, 2019 9:28 pm
One additional advantage of a Roth IRA is that you can withdraw contributions at any time without tax or penalty. (You can't do this in a Roth 401(k) until you leave the employer and roll it into a Roth IRA).

If you are not maxing out your retirement accounts, you could hold an emergency fund in your Roth IRA, getting tax-deferred growth if you don't need the money, but having the money available if you do need it. (If you do this, put enough for your emergency fund in a low-risk investment such as a short-term bond fund.)
That is what I am going to do. Use Roth IRA for my long-term before retirement account! You only pay tax on the growth portion, right? Or no? I think someone said no tax on the growth...
Thank you.

TSR
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Re: Why Roth IRA when you have not maxed out 401k?

Post by TSR » Mon Dec 09, 2019 12:40 pm

Sounds like you're on the right track with trying to figure out how to optimize your retirement savings early. You're making one small-ish mistake, however: you're treating numbers far in the future as if they are fixed rather than variable. The truth is that you have no idea what will happen in the future. It is likely that your income will change. It is likely that your savings rate will change. It is likely that your present and/or future tax brackets will change. Heck, those tax brackets may change on their own due to legislative changes. We just don't and can't know. All that said, you are not going to hurt yourself by saving in your 401k, and you're definitely going to avoid a tax hit now. If you saved in a Roth you wouldn't be hurting yourself and you MIGHT save on a tax hit in the future. On balance I like the plan of contributing to the traditional 401k, but other factors might affect that choice (the need for a more robust emergency fund, for example). The BEST plan is to work toward a life where you can max out all tax-advantaged savings vehicles for as long as possible. No worries if you're not there yet, but maybe one day. Good luck!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:47 pm

CyclingDuo wrote:
Mon Dec 09, 2019 12:39 am
stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
I think my point still stands. I am in 22% bracket now, and I will be in 12% bracket then, just because I was not wise enough like people here when I was younger. I just don't have enough time.
You mentioned upthread that you have 20 years until retirement. That's a lot of time allowing you to use your human capital for income, living below your means, and saving at a high percentage rate to play catch up.

CyclingDuo
Thank you for the encouragement. The last chart gave me hope! But it is based upon 12% growth like Dave Ramsey. I am not that optimistic. By the way, he says find those that have good track record that outperform even after higher expense ratio. How do you do that?

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 12:51 pm

TSR wrote:
Mon Dec 09, 2019 12:40 pm
Sounds like you're on the right track with trying to figure out how to optimize your retirement savings early. You're making one small-ish mistake, however: you're treating numbers far in the future as if they are fixed rather than variable. The truth is that you have no idea what will happen in the future. It is likely that your income will change. It is likely that your savings rate will change. It is likely that your present and/or future tax brackets will change. Heck, those tax brackets may change on their own due to legislative changes. We just don't and can't know. All that said, you are not going to hurt yourself by saving in your 401k, and you're definitely going to avoid a tax hit now. If you saved in a Roth you wouldn't be hurting yourself and you MIGHT save on a tax hit in the future. On balance I like the plan of contributing to the traditional 401k, but other factors might affect that choice (the need for a more robust emergency fund, for example). The BEST plan is to work toward a life where you can max out all tax-advantaged savings vehicles for as long as possible. No worries if you're not there yet, but maybe one day. Good luck!
Well noted. I will for the time being, until I can max out 401k, I will stick with traditional 401k. Not saying that only the leftover goes to Roth IRA. There is going to be adjustment of the whole plan. I have a long way to go. Thank you!

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CyclingDuo
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Re: Why Roth IRA when you have not maxed out 401k?

Post by CyclingDuo » Mon Dec 09, 2019 1:21 pm

stingray777 wrote:
Mon Dec 09, 2019 12:47 pm
CyclingDuo wrote:
Mon Dec 09, 2019 12:39 am
stingray777 wrote:
Sun Dec 08, 2019 9:57 pm
I think my point still stands. I am in 22% bracket now, and I will be in 12% bracket then, just because I was not wise enough like people here when I was younger. I just don't have enough time.
You mentioned upthread that you have 20 years until retirement. That's a lot of time allowing you to use your human capital for income, living below your means, and saving at a high percentage rate to play catch up.

CyclingDuo
Thank you for the encouragement. The last chart gave me hope! But it is based upon 12% growth like Dave Ramsey. I am not that optimistic. By the way, he says find those that have good track record that outperform even after higher expense ratio. How do you do that?
Forget about the hunt for active funds with past track record performance. That's skating to where the hockey puck was, not to where it is going or will be. How do you skate to where the puck will be in the future? Go with the low cost index funds (Vanguard, Fidelity, iShares, etc...).

If you didn't like the nominal return chart in the previous post, here's a more realistic chart based on 6% returns which ups your monthly contributions to reach some goals, but is still quite doable if you have enough income to work with...

Image

You'll notice that starting at age 45 is today's equivalent (2019/2020) of maxing out both your 401k and Roth IRA. Figuring out how to have $25,842 go into those accounts each year, and cut your lifestyle down to be funded by the remainder of your income is a path (if one was shooting for $1M at retirement with average 6% annual return).

The FIRE movement provides a lot of simple advice that is good for all ages that have not yet reached FRA. It applies just as well to those in their 40's and 50's as it does to those who are younger.

https://www.youtube.com/watch?v=egQR2kXhsGY

https://travelinspireconnect.wordpress. ... K_a7ewxukI

If you can keep your current expenses in check and boost your savings into the Advanced Super Saver or Extreme Super Saver category, you can make up a lot of ground...

Image

Our household moved to the final category model of saving for the past few years as we save one salary, and live on the other during the catch up years. Why? Because we entered the empty nest years, and the funding college education years are past which meant our expenses dropped. We also dug deep into our spend to see if any fat could be trimmed and saved for our later years. We found plenty we have been able to trim. Granted, it is easier for a dual income household that is in the empty nest years, but even if we were a single income household, finding ways to cut back and keep costs low would be an option to keep our savings rate boosted.

In our case, we are tapping into utilizing these years as catch up years and provide the final boost to our nest egg before we retire. We will have the option to FIRE if one considers FRA according to SS for us is 66 and 67 respectively, so anything before that would be retiring early for us between now (ages 58/61) and retirement age benchmarks of 65 or our government assigned FRA's (67 for me, 66 and change for my spouse).

Take advantage of the next 20 years to build what you can.

CyclingDuo
Last edited by CyclingDuo on Mon Dec 09, 2019 1:34 pm, edited 1 time in total.
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fyre4ce
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Re: Why Roth IRA when you have not maxed out 401k?

Post by fyre4ce » Mon Dec 09, 2019 1:34 pm

A general point about the "401k vs. IRA" comparison is that increasingly, good 401k's actually offer better investment options than IRAs. In my IRA I get the Admiral Shares class funds, with expense ratios around 0.04%. In my 403b I can get Vanguard "Institutional Plus" funds with ~0.015% expense ratio. Granted, the difference is small ($15 vs $40 per year per $100,000 invested), but it's something. This is also true for a family member's 401k I recently looked at. Standard advice going back 10-20+ years has been to prioritize IRA over 401k after any match, on the assumption that the investments are better, but this is now often not the case.

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Mon Dec 09, 2019 4:46 pm

Welcome to the forum :) .

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
I have not seen the selection of funds that the employer offers (available in a few days), but I heard that there would be Vanguard index funds. Yes!

Q1 - Under the circumstance, do I still want to open Roth IRA, like these authorities say? If so, why? I think it is applicable only if you get million dollars or more in the bag, and you will be in a higher tax bracket.
"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".

The most common reason to want an IRA before contributing the annual maximum to a 401k is the mediocre or high cost funds offered in many 401k plans. If good low cost funds are offered in your 401k plan, then it is probably better to contribute the annual maximum to your 401k as a priority ahead of contributions to an IRA.

Don't decide until you know what funds are offered offered in your employer's new 401k plan, the expense ratios charged in the plan, and whether plan participants are required to pay any fees in addition to the expense ratios.

stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
Q2 - Traditional 401k over Roth 401k for me, right? Online calculators show I get more if I did Roth 401k. I don't understand.
For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

What is your profession or occupation?

About how much do you currently have in traditional tax-advantaged accounts?

Wiki article, "Traditional vs Roth".


stingray777 wrote:
Sun Dec 08, 2019 3:58 pm
Q3 - Before the year is over, I want to put as much as possible into either 401k or Roth IRA. The employer is moving from simple plan to 401k. Is there going to be a fee for transfer from simple to 401k, based upon how much you have in it? If so, I want to open up Roth IRA and put $6000 there now. If not, probably as much as possible into 401k. I think HR said you can write a check. I will put them into VTSMX in Roth IRA, just like I am planning to use that in 401k.
I don't believe that there will be a fee when the employer switches from a SIMPLE IRA to a 401k plan.
Last edited by ruralavalon on Mon Dec 09, 2019 5:10 pm, edited 3 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Mon Dec 09, 2019 4:49 pm

stingray777 wrote: I suppose you are talking about checking my 401k's overhead management cost on top of expense ratio from each Vanguard index fund. I will try to look for it in the website. So, fund's expense ratio is the same as that of straight from Vanguard, right? Then what range should that management cost for my 401k be in?

If I buy the same fund from my Vanguard Roth IRA, is it free (if more than $10k in the account, or something like that)? Is that why people tend to use Roth IRA, even when they have the same funds of their preference?
Your logon may not be good until the first of the year.

The cost might be the same as Vanguard or different. That is why you need to check. You should use your plan at work even if the cost is a little more. Let us know what you find out.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 9:41 pm

ruralavalon wrote:
Mon Dec 09, 2019 4:46 pm

Don't decide until you know what funds are offered offered in your employer's new 401k plan, the expense ratios charged in the plan, and whether plan participants are required to pay any fees in addition to the expense ratios.
Yes, sir.
I do not have any pension. I am a man of no plans right now. I have almost none in simple plan. Stupid, I know.

I am going to open Roth IRA now, and put $6000 there. I think I will have two more paychecks this year, so every bit will go into Simple Plan. No take-home. I think HR told me that I could write a check and put more into it. I just will not have company matches. Fine, because I have that portion already.

One more question, though. Vanguard charges annual fee, if the account (Roth IRA for me) has less than $10K. Is that by the calendar year, or a year from the day you open up an account? I am wondering if they will charge me if I put $6000 now, and not $10K.

Gracias!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 10:22 pm

Hopefully this discussion here will help many others in the similar situation. Thank you all!

Next step is to the asset allocation.
Some people are willing to help me a little further. Thank you! I do not want to deviate too far, but I will put some details here:

- 20 years till retirement
- Almost nothing in any bag. No pension. (So I don't have a choice but to be a little aggressive)
- Planning to put $13000 next year before tax into 401k.
- Allocation: VTSMX/VTSAX (Total Stock Market) 63% / VGTSX/VTIAX (International) 27% / VBMFX/VBTLX (Bond) 10%

I hear that market is going to slow down or into recession in the next couple of years, so I am debating if I want to put 20% into bond. Didn't Jack Bogle say that as well?
Hopefully I see those 3 funds in my 401k. They gave me a little handout on how to access the 401k website. It has a screenshot with 5 Vanguard index funds out of 20. I also see some DFAs. I read Daniel Solin's book that said, they have a good track record and are doing better than S&P 500, so it is worth it if you have the choice in your 401k.
Last edited by stingray777 on Mon Dec 09, 2019 11:49 pm, edited 1 time in total.

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Mon Dec 09, 2019 10:39 pm

Any disclosed fees in a 401k plan is often levied quarterly. So if you have been told the fees is $100 per year, that is $25 per quarter. They take the quarter end balances. So if on December 31 you have more than $10k, you escape the $25 fees. Else, pay $25 fee. If later, by March 31st your assets exceed $10k, no fees. As you keep contributing, hopefully no further fee either!

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Mon Dec 09, 2019 11:42 pm

lakpr wrote:
Mon Dec 09, 2019 10:39 pm
Any disclosed fees in a 401k plan is often levied quarterly. So if you have been told the fees is $100 per year, that is $25 per quarter. They take the quarter end balances. So if on December 31 you have more than $10k, you escape the $25 fees. Else, pay $25 fee. If later, by March 31st your assets exceed $10k, no fees. As you keep contributing, hopefully no further fee either!
It's good to know how it works with 401k. Thanks.
What about Roth IRA account? If so, the cut off dates are 3/31, 6/30, 9/30, and 12/31, regardless when you opened it?

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Tue Dec 10, 2019 12:03 am

stingray777 wrote:
Mon Dec 09, 2019 11:42 pm
What about Roth IRA account? If so, the cut off dates are 3/31, 6/30, 9/30, and 12/31, regardless when you opened it?
A Roth IRA with companies such as Fidelity, Schwab, or Vanguard will not have quarterly fees (unless perhaps you insist on statements by US Mail instead of electronic, etc.).

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Tue Dec 10, 2019 12:22 am

FiveK wrote:
Tue Dec 10, 2019 12:03 am
stingray777 wrote:
Mon Dec 09, 2019 11:42 pm
What about Roth IRA account? If so, the cut off dates are 3/31, 6/30, 9/30, and 12/31, regardless when you opened it?
A Roth IRA with companies such as Fidelity, Schwab, or Vanguard will not have quarterly fees (unless perhaps you insist on statements by US Mail instead of electronic, etc.).
I had read the Vanguard's fee page, but it did not really click in me. Now I understand. Thank you! I will choose email statement option.

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ruralavalon
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Re: Why Roth IRA when you have not maxed out 401k?

Post by ruralavalon » Tue Dec 10, 2019 10:55 am

stingray777 wrote:
Mon Dec 09, 2019 10:22 pm
Hopefully this discussion here will help many others in the similar situation. Thank you all!

Next step is to the asset allocation.
Some people are willing to help me a little further. Thank you! I do not want to deviate too far, but I will put some details here:

- 20 years till retirement
- Almost nothing in any bag. No pension. (So I don't have a choice but to be a little aggressive)
- Planning to put $13000 next year before tax into 401k.
- Allocation: VTSMX/VTSAX (Total Stock Market) 63% / VGTSX/VTIAX (International) 27% / VBMFX/VBTLX (Bond) 10%

I hear that market is going to slow down or into recession in the next couple of years, so I am debating if I want to put 20% into bond. Didn't Jack Bogle say that as well?
Don't pay attention to market forecasts in setting your investing plans. Nobody really knows what the markets are going to do.

What is your tax bracket, both federal and state?

What is your tax filing status?

What is your age?

Do you have any debt? If so what types, amounts and interest rates?

Do you have any dependents?

stingray777 wrote:
Mon Dec 09, 2019 10:22 pm
. . . . They gave me a little handout on how to access the 401k website. It has a screenshot with 5 Vanguard index funds out of 20. I also see some DFAs. I read Daniel Solin's book that said, they have a good track record and are doing better than S&P 500, so it is worth it if you have the choice in your 401k.
Please list the funds offered in your employer's new 401k plan, giving fund names, tickers and expense ratios.

Are there any additional fees charged, like administrative or record keeping fees?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Tue Dec 10, 2019 10:09 pm

I've got a list today. Very limited:
Aggressive
Conservative
Highly Aggressive
Moderate
Risk Averse
Vanguard Federal Money Market Fund Inves
DFA Inflation-Protected Securities Portf
Vanguard Short-Term Inflation-Protected
DFA Five-Year Global Fixed Income Portfo
DFA International Real Estate Securities
DFA U.S. Large Cap Growth Portfolio Inst
DFA U.S. Small Cap Growth Portfolio Inst
Vanguard 500 Index Fund Admiral Shares
DFA U.S. Large Cap Value III Portfolio
DFA Emerging Markets Core Equity Portfol
DFA Large Cap International Portfolio In
DFA International Small Company Portfoli
Vanguard Mid-Cap Growth Index Fund Admir
Vanguard Real Estate Index Fund Admiral
DFA U.S. Targeted Value Portfolio Instit

I see a few Vanguards, but none that I wanted. How does it look? I cannot find where the overhead cost is. I cannot find expense ratio through my 401k. All I find is a link to MorningStar page for each fund. This is bad, isn't it?

Here is my situation:
What is your tax bracket, both federal and state?
(Federal) 22% now -> 12 % then (State) 3%
What is your tax filing status?
Single
What is your age?
45
Do you have any debt? If so what types, amounts and interest rates?
no
Do you have any dependents?
No

- Almost nothing in any bag. No pension. (So I don't have a choice but to be a little aggressive)
- Planning to put $13000 next year before tax into 401k.

I will start looking into each one.

mortfree
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Re: Why Roth IRA when you have not maxed out 401k?

Post by mortfree » Tue Dec 10, 2019 10:36 pm

Vanguard 500 would be the one I would look into using.

lakpr
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Re: Why Roth IRA when you have not maxed out 401k?

Post by lakpr » Tue Dec 10, 2019 10:38 pm

If every fund in your plan is being linked to the MorningStar page, it seems that the expense ratios in your plan are the same as the retail rates. I would therefore invest in Vanguard 500 index fund by itself, that is more than good enough.

Your bond funds are not that good - only short term and inflation protected securities whose yields are lower than a good intermediate term bond fund.

Since you said you don't have any money in any bag, there is (in my opinion) no need to invest in a bond fund in your 401k at this time. Invest 100% of your contributions into the 500 index fund. When you get to about $100k in the 401k plan (which should be around 4 or 5 years if you completely max out the 401k contributions every year), THEN we can revisit allocation to bonds.

I liken this to taking the expressway to your destination. First get to a stage where it makes sense to start divvying up your pot of money into various buckets, as fast as possible. Then divvy up. No need at this time to contemplate adding bonds in your portfolio.

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celia
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Re: Why Roth IRA when you have not maxed out 401k?

Post by celia » Tue Dec 10, 2019 11:59 pm

Before you get very far, you should figure out your desired Asset Allocation. Basically, this is the ratio of stocks to bonds you think you should hold. The "right" combination for you will help you sleep well at night (without worrying about your assets). More stocks mean more volatility, but more potential for growth. More bonds mean more safety, but slower growth.

Since you're planning to put money into a Roth IRA, be sure the Roth holds primarily stock funds, so you can maximize how much future growth is tax-free (when withdrawn after a Roth IRA has been open 5 years and you are over 59.5). Your desired bonds should be in a tax-deferred account (401K or Traditional IRA) since the interest they earn doesn't get any preferential tax treatment, like Qualified Dividends or LT capital gains do, in taxable. Either stocks or bonds can go into your taxable account.

Tax-efficient Fund Placement goes into more detail on this.

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stingray777
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Re: Why Roth IRA when you have not maxed out 401k?

Post by stingray777 » Wed Dec 11, 2019 12:23 am

Diversification is the key, right? Having 100% of Vanguard 500 is against that basic rule.

Since I do not have Total Stock Market, what do I do? Do you see any that is close to it? Or Do I go with S&P500 (50%) and US small cap funds(25%)? Isn't that close enough? I assume that much of Mid-cap is included in S&P500.

lakpr mentioned that I do not have good bonds in my selection (I have not checked myself). Maybe I will skip bond totally.

What about International? I don't see Vanguard Total International Stock Index (VTIAX), how do I resemble it? I want to do 25%.

S&P500 (50%)
Small cap (25%) like DFA U.S. Targeted Value Portfolio OR DFA U.S. Small Cap Growth Portfolio Inst (Expense ratio of 0.38% - is it too high?)
International (25%) - Which one?

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FiveK
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Re: Why Roth IRA when you have not maxed out 401k?

Post by FiveK » Wed Dec 11, 2019 12:33 am

stingray777 wrote:
Wed Dec 11, 2019 12:23 am
Diversification is the key, right? Having 100% of Vanguard 500 is against that basic rule.

Since I do not have Total Stock Market, what do I do?
Relax, and read John C. Bogle on the S&P 500 vs. the Total Stock Market - CBS News. Or read that first, and then relax. :)

mortfree
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Re: Why Roth IRA when you have not maxed out 401k?

Post by mortfree » Wed Dec 11, 2019 12:42 am

stingray777 wrote:
Wed Dec 11, 2019 12:23 am
Diversification is the key, right? Having 100% of Vanguard 500 is against that basic rule.
Diversification is not how many funds you own. It is what the fund owns.

Total US Stock and S&P500 hold a good number of stock funds and that is how you achieve diversification.

Adding another fund to a broad based fund is sometimes referred to as tilting. As in buying more of a specific sector or stock.

For instance I tilt Apple because I own VTI and the individual stock.

retiredjg
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Re: Why Roth IRA when you have not maxed out 401k?

Post by retiredjg » Wed Dec 11, 2019 8:34 am

stingray777 wrote:
Tue Dec 10, 2019 10:09 pm
I see a few Vanguards, but none that I wanted. How does it look? I cannot find where the overhead cost is. I cannot find expense ratio through my 401k. All I find is a link to MorningStar page for each fund. This is bad, isn't it?
Not necessarily. At this point they might just be showing you the funds and you'll find out the costs later. Or the cost shown on Morningstar may be your costs. Don't worry, this will be a fine plan and it is not "very limited".

Using the 500 index alone is fine.

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